An analysis of Texas Health Resources (THR) 2010 data shows that privately insured patients who had one or more surgical complications had more than triple the contribution margin, compared without a complication.

THR was the focus of a Harvard School of Public Health study in the April 17 edition of the Journal of the American Medical Association. The contribution margin—defined as revenue minus variable costs—was 330 percent for privately insured patients and 190 percent for Medicare patients.

THR had a surgical complication rate of 5.3 percent in 2010. The surgical complication rate varies widely, from 3 percent to more than 17 percent, depending upon the procedure, type of complications and length of follow-up, the study noted.

“Effective methods for reducing surgical complications have been identified. However, hospitals have been slow to implement them,” the researchers wrote.

The study’s implication is that hospital efforts to reduce surgical complications could worsen their near-term financial performance.

However, hospitals with a substantial Medicaid or self-pay market share could improve their financial performance. The contribution margin for Medicaid surgical complications was a loss of $2500, meaning the reimbursement did not cover the variable costs.

In an editorial accompanying the study, Princeton economist Uwe Reinhardt wrote, “Suggesting to the public that fellow citizens receiving Medicaid have adequate health insurance but then not covering even the clinicians’ and hospitals’ variable costs of treating those patients might warrant the label of ‘government-initiated Medicaid fraud.’ ”

The researchers did not estimate the positive effects of reducing complications on a hospital’s reputation or potentially reducing hospital readmissions. The study suggests that bundled payments that include average costs of complications into the surgery’s base diagnosis related group payment could provide a stronger financial incentive to reduce complications.

Dr. Mark Lester, THR southeast zone clinical leader and one of the study’s authors, said the research underscores the fact that payment reform needs to accompany the health reform law.

Reinhardt noted, “The study … provides important data on a pressing clinical and financial problem affecting hospitals: how to attribute revenue and cost to specific service lines.”

U.S. health expenditures for surgical procedures, estimated at $400 billion annually, are expected to grow faster than the economy over the next decade, according to The Boston Consulting Group.

THR implemented Safe Surgery in 12 THR hospitals in January 2011—designed with Harvard professor Atul Gawande, MD, one of the study’s authors. Results from that program are expected within the next 12 months. The program uses a customized surgical checklist to enhance performance and patient safety.

Lester said the JAMA study data would serve as a baseline to determine the effect of the Safe Surgery program.

THR recently announced it would publish its quality data, including complication rates and readmission rates for certain conditions, within the next three years.

Dan Varga, MD, THR chief clinical officer, said reducing surgical complications is “what people expect us to strive toward and what we expect of ourselves. It’s been called demand destruction, because we’re trying to help different populations of people avoid hospital care if they don’t need it. Our task is to learn how to make the new economics of hospital care work.”